City Dwelling: Contemplating the Merits of Multi-Family Lending (August 2003)

INDEPENDENT BANKERAUGUST 2003

City DwellingContemplating the merits of multi-family lending

by Robert O' Connor

Too many community bankers view multi-family housing as something best left to the big institutions. But community banks that shy away from this lending sector on the grounds that it is too demanding or complex should consider that multi-family housing, like community banks themselves, are integral to local life.

Randy Clark, vice president of Gardiner Savings Institution in Gardiner, Maine, believes that community banks could be doing more in the multi-family sector. He says that any bank that offers commercial loans should also be in multi-family lending. But while it’s a market the $600 million-asset bank serves, it does not go out of its way to chase the business. Prospective borrowers usually approach the bank, he says. Typically projects land at Gardiner Savings by word of mouth and by referral.

Clark says that community banks are popular with these borrowers because of their perception that the big banks are too bound up with rules and regulations. Gardiner Savings’ multi-family housing portfolio includes buildings ranging from 12 to 20 units in nearby Portland, the state’s largest city, to eight to 10 units in the Gardiner area.

Clark says that the Portland market is strong for multi-family, with good demand for apartments and high rents. He adds that low interest rates are helping the multi-family market across the board. “We’ll go anywhere in Maine,” he says.

David Reiling, president and CEO of University Bank in St. Paul, Minn., says that the advantages of the multi-family market may not always be apparent to community banks. “For smaller community banks,” Reiling says, “the size of a project can be prohibitive or require that the bank find other participant banks to share in the loan.”

Reiling says that the complexity of some multi-family deals, and the range of financing sources that may be required, can be another barrier for community banks. He notes that funds could, for instance, come from the city, state or federal governments, or non-profit organizations. They could take the form of low-income housing tax credits where a community bank may lack experience.

Reiling says it is important for a bank to understand “the underwriting from a cash flow standpoint.” Factors include vacancy rates, the presence of competing projects and the operational skills of the borrower. “The management of the property,” he says, “is probably the single greatest factor to the successful repayment of the underlying loan.”

Understanding the Community

But Reiling says community banks also have a built-in advantage in dealing with the multi-family sector. He notes that their strong local market knowledge can guide them as to what kind of housing is likely to be in demand. He points out that, while families are likely to need apartments with three or four bedrooms, students and lower-paid workers may prefer one-bedroom units.

The local knowledge of community banks can give them the confidence to take on multi-use projects that the big banks would be reluctant to touch. Reiling cites University Bank’s experience in financing an 18-unit apartment building with a small commercial art store on the first level. “We got the deal,” Reiling says, “because commercial space is prohibited under the larger players’ underwriting standards.”

Banks also need to be aware of how land is used locally. Reiling notes, for instance, that the Minneapolis-St. Paul area has a large amount of single family and a shortage of affordable housing. Building multi-family housing, he says, would allow more people to live in the same space. “Assembling the land,” he says, “is the tough part.”

Mitchell Kiffe, vice president for multi-family production for Freddie Mac, says that multi-family business makes demands on a bank in terms of its expertise, software and accounting systems. He says that community banks have the option of co-brokering transactions or entering into joint ventures. He adds that community banks are often well placed to handle the relatively small loans associated with tax credit financing.

Despite the current low interest rates that are causing many people to buy homes and leave rental housing, Kiffe regards the long-term picture for multi-family housing as good. He says that there is a coming generation of young adults who can be expected to be renters. And he notes the country continues to attract immigrants, who, initially at least, are likely to rent. “How much immigration we have will determine how much demand there is for multi-family housing.”

Richard Lawch, senior vice president for multi-family business and customer solutions for Fannie Mae, says that a community bank seeking to get into the multi-family business for the first time should consider establishing relationships with the conduits offered by insurance companies, large commercial banks and major investment banks. He says these conduits can accommodate a wide range of business. But he adds that they tend to restrict the product to a 10-year fixed rate.

Prospects for Local Bankers

Lawch says that there are aspects of the multi-family market that would tend to push an independent bank toward the secondary market. He notes, for instance, that many community banks might prefer to hold variable rate loans on their books, as a good match between assets and liabilities. At the same time, he says, the banks might decide to sell the fixed-rate loans to the conduits.

When dealing with an institution that is interested in selling off product, Fannie Mae will look closely at the bank’s portfolio with an eye to the options it can offer. The bank can decide between retaining some of the risk and selling off the whole package. “These institutions tend to generate smaller loans,” Lawch says, “which Fannie is very eager to [purchase].”

Lawch says that Fannie Mae is very interested in the multi-family business of community banks. “Working with the [community bank] lenders requires a lot of effort,” he says. “But the payoff is that you will find these institutions out there with a great credit culture, great experience, and they’re able to generate small loans, which we are particularly interested in getting at.”

The $68 million-asset Community Guaranty Savings Bank in Plymouth, N.H., serves a multi-occupancy market that is geared heavily toward college students, according to Ron Sibley, the bank’s president. Many of the buildings, he says, were converted for student occupancy. Sibley says that the bank’s multi-family portfolio has been holding steady at about $4 million for the last two or three years.

In considering any kind of multi-occupancy loan, Sibley is guided by the building’s revenue prospects. He also wants to see evidence that the owners have set aside sufficient resources to cover vacancies, debt service and upkeep. And he would prefer a landlord either to live on the premises or have a resident manager in place. Maintenance is particularly important when students are involved. Sibley says that the best local operators spend the summer repairing the damage that the students have caused during the year.

Sibley, who is also president of the Community Bankers Association of New Hampshire, served on a housing study committee in Plymouth. The committee found that the presence of so many students in the town has squeezed the rental market in the low- to moderate-income bracket. He says that things are particularly difficult for people who can’t raise the down payments to take advantage of the current low interest rates.

Multi-family is not a simple market. It requires strong demands in terms of skills and lending capacity. But any bank that has mastered the art of commercial lending should view multi-family as another source of valuable revenue.